By DAN GOODIN
The Associated Press
Thursday, July 20, 2006; 7:59 PM

SAN FRANCISCO -- The former chief executive of Brocade Communications Systems Inc. was charged Thursday with fraud, the first criminal complaint in a stock options probe that involves more than 55 U.S. companies.

Gregory L. Reyes, 43, became the first chief executive to be charged criminally for improper practices related to the accounting of stock options grants.

Reyes and another executive, Stephanie Jensen, 48, also face civil charges by the Securities and Exchange Commission, according to a release issued jointly by that agency and the U.S. Attorney's office in San Francisco. If found guilty, each faces a maximum penalty of 20 years in prison and a $5 million fine.

Antonio Canova, Brocade's former chief financial officer, is also named in the SEC suit. He allegedly signed off on financial documents after being warned that option paperwork had been forged, according to the complain.

Attorneys for Reyes and Jensen, Brocade's former vice president of human resources, said in separate statements that their clients were innocent. Canova could not immediately be reached for comment.

Reyes resigned in January 2005. That was shortly after the San Jose-based maker of data storage devices said an internal audit had uncovered suspicious accounting of stock options, which allow employees to buy shares of their company's stock in the future at a set price _ and potentially reap a big windfall if share prices later rise.

Brocade, which was once worth as much as $24 billion, had to restate financial results for fiscal years 1999 through 2004, shaving 20 cents off previously reported earnings per share figures. The company, which today is valued at about $1.6 billion, saw its shares close down 11 cents, or 1.8 percent, to $5.91 Thursday on the Nasdaq Stock Market.

At least 58 companies have disclosed that their stock options practices are being investigated by the Department of Justice or the SEC. At issue in many of the probes _ and a central allegation in Thursday's actions _ is a practice known as backdating, in which options are retroactively issued to coincide with low points in a company's share price.

The criminal complaint, filed in U.S. District Court in San Francisco, is the strongest sign yet that federal authorities plan to vigorously prosecute companies whose stock options practices skirted the law.

"It demonstrates not only a perception that the practice is unfair to outside investors, but a willingness to expend resources to correct the problem and help restore public faith in the process," said James Aquilina, a former assistant U.S. attorney who has prosecuted dozens of white collar crimes.

Stock options give a person the right to buy shares in the future at a set fee, often called an exercise price. If the stock price rises following the grant of the options, they can represent a profit worth millions of dollars.

According the complaints, Reyes and Jensen authorized options grants with exercise prices that were below the price of Brocade's stock on the day they were issued, giving the recipients an immediate paper profit.

Reyes, who in 2000 landed on Forbes list of the 400 richest Americans, then backdated the documents so strike prices appeared to be the same as the company's share price on the date they were issued, according to the complaints.

Authorities also allege Reyes and Jensen regularly backdated board of director meeting minutes so that it appeared the stock options committee granted options on dates that Brocade's share price was relatively low. In fact, the authorities allege, no such meetings occurred on those dates.

The pair also had employment offer letters backdated so workers would receive options that were dated at low points in the company's share price that predated their first day of work, according to the criminal complaint.

In a release, Richard Marmaro, a Los Angeles attorney at Skadden Arps, Slate, Meagher & Flom, representing Reyes, criticized the allegations and said they were not based on the facts in the case.

"Financial gain is always the motive in securities fraud cases, and here there was none," Marmaro said in the release, which was issued shortly before authorities announced the charges. "There is not even an allegation of self-enrichment, or self-dealing. Nor is there any evidence of an intent to misstate the financial statements of the company."

Jan Little, a lawyer representing Jensen, also disputed the charges and said her client had no responsibility for finance or accounting.

"These charges are completely wrong-headed, and we will vigorously fight them in court," she said.

Companies began increasingly relying on options in the late 1990s, when executives touted them as an important compensation and retention tool and as a way to align employees' and shareholders' interests.

In a statement, Brocade noted that none of the officers involved in the past granting of stock options remain employed with the company. Brocade has reserved $7 million to cover a proposed settlement with the SEC, which is pending approval of the commissioners.

At least 17 senior executives or directors with nine publicly traded companies _ including four CEOs, five finance chiefs and three general counsels _ have been fired or have stepped amid the expanding probe into stock options practices.

SEC Chairman Christopher Cox, at a news conference in San Francisco, said the actions show that "the full weight of the federal government is being put behind this effort to stomp out fraudulent stock options backdating."